Interim
Joint Committee on State Government

Minutes
of the<MeetNo1>4th Meeting

of the 2007 Interim

<MeetMDY1>October 24, 2007

The<MeetNo2>fourth meeting of the Interim Joint
Committee on State Government was held on<Day>Wednesday,<MeetMDY2>October
24, 2007, at<MeetTime>1:00 PM, in<Room>Room 154 of the Capitol Annex. Representative
Mike Cherry, Chair, called the meeting to order, and the secretary called the
roll.

The minutes of the September 26 meeting were approved
without objection, upon motion by Representative Belcher.

First on the agenda was discussion of recommended changes to
the Kentucky Code of Legislative Ethics, as presented in the Legislative Ethics
Commission's July 2007 report to LRC. Guest speakers were Judge Anthony
Wilhoit, Executive Director of the Commission, and George Troutman, Commission
Chairman. The report recommendations are summarized as follows:

·Amend KRS 6.807, governing the filing of updated registration
forms by legislative agents and their employers to add that a form sent to the
Commission through the U. S. Postal Service or another recognized mail carrier
shall be deemed to have been timely filed if received by the mail carrier by
the last day for filing with the Commission;

·Delete language in KRS 6.821 that requires a legislative agent to
list expenditures "whether or not reimbursed" by an employer and add
language to clarify that a legislative agent must list all lobbying
expenditures, unless reimbursed by an employer;

·Clarify the definition of "employer" in KRS 6.611(12)
to ensure that the proper employer of a lobbyist registers with the commission
and end confusion about whether a law firm, public relations firm, or other
type of consulting firm may itself register as the employer for its employees
or associates who are lobbying for third parties who have hired the firm to
lobby;

·Enact a "no cup of coffee" rule by repealing the
provision allowing each lobbyist and employer to spend up to $100 annually on
food and beverages for each legislator; this provision generally applies to
lunches or dinners involving a lobbyist and a legislator and not to events
involving groups of legislators;

·Treat candidates in the same manner as legislators by limiting
the interaction between lobbyists and candidates who have filed to run for
election to the General Assembly;

·Prohibit legislative candidates—including incumbent legislators—from
accepting contributions from employers of lobbyists or from political action
committees during a regular legislative session;

·Allow a lobbyist or employer to pay legislators' travel expenses
for in-state events, if the legislator received prior approval from the
Legislative Research Commission; require that in-state travel expenses paid by
a lobbyist or employer be reported to the Ethics Commission; prohibit lobbyists
or employers from paying for legislators' out-of-state travel and lodging;
adopt a new definition of "in-state" to include areas contiguous to
Kentucky, such as Cincinnati;

·Prohibit any mass mailing by a legislator at public expense for
60 days prior to an election;

·Reduce the Current Issues Seminar from three hours to two hours
annually, and add one hour of ethics training for legislative staff;

·Amend KRS 6.686(2)(b) to provide that the Commission may confirm
the existence of a preliminary inquiry only if the alleged violator has
publicly disclosed the existence of the inquiry; if the complainant publicly
discloses the existence of the complaint or preliminary inquiry, permit the
Commission to dismiss the complaint without prejudice, meaning that it could be
refiled;

·Amend KRS 6.686(1)(a) to delete the requirement that a complaint
be filed prior to a Commission investigation, but add language to clarify that
"the Commission shall have no jurisdiction in the absence of a complaint
to impose any penalty, except administrative penalties listed in KRS 6.807 and
6.821;

·Amend KRS 6.661(5) to conform to the 1996 amendment of KRS 6.651,
thereby restricting political activity of Legislative Ethics Commission staff
as was originally intended by the General Assembly.

Judge Wilhoit gave an overview of the recommendations. He
and Mr. Troutman then answered questions from the Committee.

Representative Cherry commented on the recommendation to
clarify or delete language referring to "legislative liaison." He explained
that he had served as a liaison officer to Congress while in the Navy. He said
that, in his opinion, he was actually serving as a lobbyist but was called a
liaison instead because the law did not allow the military to have lobbyists.
Judge Wilhoit said that the term in the ethics code perhaps should be clarified
rather than deleted.

Representative Cherry said that House Bill 396, which he
sponsored in 2006, mirrored many of the Commission's recommendations and that
he intends to promote similar legislation in the 2008 session. He said he is
proud of Kentucky's reputation as a strong legislative ethics state, and he is
interested in Kentucky's code being a model for other states.

Senator Carroll asked whether the Commission's recent
opinion relating to legislators soliciting contributions from lobbyists [OLEC
07-04, October, 23, 2007] contradicts the ruling in a case that was before the
Commission within recent months. Judge Wilhoit explained that the case in
question was based on a 1995 opinion, which would permit the individual to
solicit donations for civic or charitable entities, as long as that
solicitation is broad based and not aimed primarily at lobbyists. The October
23 opinion ruled that political parties are not considered civic entities, within
the meaning of that term as used in KRS 6.626(1), and that a legislator may not
solicit a contribution from a legislative agent for a political party. The
latest opinion, therefore, reversed the 1995 opinion to the extent that it is
to the contrary. Mr. Troutman clarified that the reversal was based on an
ongoing review and was not as a result of that case, although the 2007 opinion
was formally issued in close proximity to the case. Judge Wilhoit stressed
that, based on the October opinion, a legislator may no longer solicit campaign
contributions from a lobbyist for a political party.

Representative Wilkey said he appreciates the work of the
Commission and appreciates the clarification of the political party rule, which
has been confusing to legislators. He spoke in favor of a "no cup of
coffee" rule and said he believes most legislators already observe this
rule. Judge Wilhoit said that lobbyists expenditure statements filed with the
Commission seem to confirm this.

Senator Harris said that when he attended a reception for a
new business hosted by Greater Louisville, Inc., a couple of years ago, he was
later billed for $15 for peanuts because the host organization was being very
careful to strictly adhere to the ethics code. He said he was invited because
he was the resident senator and that billing him for peanuts "left a bad
taste in his mouth." As a result, he might be reluctant to attend this
type of event if a "no cup of coffee" rule were in place. He spoke
also of another similar situation that resulted in his being billed, and he
expressed concern that a strict "no cup of coffee" rule would be too
limiting. He added that Alabama permits lobbyists to spend $250/day on
legislators, in contrast to Kentucky's current $100/year rule. When
Representative Cherry asked whether restrictions would apply to events such as
the annual dinner given by Murray State University for regional legislators,
Judge Wilhoit clarified that such an event sponsored by an educational
institution would not be affected. He added that he does not disagree with
Senator Harris' concern.

Representative Graham asked whether the recommendation to
place restrictions on legislative candidates might be subject to legal
challenge. Judge Wilhoit said that it could be but could probably withstand the
challenge as an anti-corruption measure. He added that the recommended
restriction would be limited to the time after a candidate files for office up
to the time of election; otherwise, it would not stand up in court.

Representative Graham asked whether the recommended ethics
training for LRC staff could include an additional hour for sexual harassment
training, which LRC already requires staff to attend each year. Judge Wilhoit
said that would be possible. Representative Graham suggested that KLEC consider
adding that to its list of recommendations.

Representative Ballard questioned whether newspaper
endorsements should be allowed for legislative candidates, in view of the value
attached to these endorsements. Judge Wilhoit said that prohibiting the
endorsements would probably be ruled in violation of the First Amendment to the
U. S. Constitution.

Representative Stacy commended the Commission for its
outstanding work. He said that legislators sometimes produce large mailings at
the end of a session in response to constituent inquiries. He asked how these
mailings would be affected by the recommendation to prohibit mass mailings at
public expense for 60 days prior to an election. Judge Wilhoit said that
"end of session" reports sent to constituents generally could pose a
problem but that mailings to groups such as the Chamber of Commerce, for
example, to report on legislative action would not be considered a political
mass mailing. Representative Stacy asked whether a "session roundup"
to respond to all communications received during a session would be considered
a mass mailing. Judge Wilhoit said that would appear to be more like a
political mailing but would depend on the wording. Mr. Troutman said that the
Commission has had a lot of problems relating to the content of mass mailings.
He went on to say that legislators often call to ask the Commission to review
content prior to mailing and that in quite a few cases staff has recommended minor
changes to comply with ethics requirements.

Representative Rollins expressed concern that the "mass
mailing" recommendation would be in conflict with e-mails sent at the end
of a session to update large numbers of constituents—state employees, for example—even
though not sent for political reasons. Judge Wilhoit suggested that this
concern could be resolved by reducing the recommended time limit prior to an
election from 60 days to 45 days.

Representative Stacy asked about the recommendation to
delete the requirement that a complaint be filed prior to a Commission
investigation. Judge Wilhoit explained that this change would enable the
Commission to do some preliminary investigation in order to discourage the
filing of frivolous complaints.

Responding to questions from Representative Bratcher, Judge
Wilhoit explained the complaint process. Representative Bratcher said that the
process is fair and honest, and he complimented the work of the Commission.

Senator Gibson asked whether legislative candidates receive
ethics training. Judge Wilhoit said that the Commission holds training sessions
in Frankfort for persons who file for legislative office; if they cannot come
to Frankfort, the information is sent to them by mail. Senator Gibson asked how
losing candidates would be penalized for ethics violations. Judge Wilhoit said
that any candidate or legislator who violates the code of legislative ethics is
guilty of ethical misconduct and could be fined as much as $2,000.

Representative Cherry thanked the speakers. The next item on
the agenda was a status report on the Kentucky Lottery Corporation. Guest
speakers from the Lottery were Arch Gleason, President and CEO, and Mary
Harville, Senior Vice President and General Counsel. Mr. Gleason gave an
overview of lottery operations, presented in PowerPoint. (Written copies of the
presentation were distributed to the Committee.)

In summary, Mr. Gleason said that lottery sales have grown
from $486 million in FY 1993 to $744 million in FY 2007, while profits have
grown from just under $100 million to $193.6 million. This represents a sales growth
of 53 percent and a 98 percent growth in profits. Revenue has flattened out
somewhat due to expansion of more active forms of gaming in neighboring states
(Indiana, West Virginia, and Illinois) and the beginning of the Tennessee
lottery in 2004. The greatest growth that has occurred in the lottery industry
in the U. S. over the last decade has been in the 14 states that have allowed
more aggressive forms of gaming.

Mr. Gleason went on to say that since the lottery's
inception in 1989, $1.6 billion in proceeds has been transferred to the General
Fund, including $214 million for the SEEK (Support Education Excellence in
Kentucky) program. Grants and scholarship funding through the end of last year
was just under $1 billion. The literacy program has been funded at $3 million
per year for eight years, and nearly $21 million was transferred to the
Affordable Housing Trust Fund (FY 1999 through FY 2003). Today unclaimed prizes
are distributed first to the KEES (Kentucky Educational Excellence
Scholarships) Reserve Fund ($8 to $11 million per year). Literacy programs are
funded by $3 million annually. The remainder of net revenues are distributed to
the KEES program (45 percent of proceeds) and the College Access Program and
Kentucky Tuition Grants (55 percent). Few people know how Kentucky lottery
proceeds benefit the Commonwealth. As indicated by a 2005 U. of L. Urban
Studies Institute survey of 1,238 adults, 84 percent are unaware that the
Lottery has contributed more than $2 billion to the Commonwealth; 80 percent
feel they do not get enough information on how proceeds are spent; and 92
percent support allowing the Lottery to advertise how proceeds are spent. Mr.
Gleason said he firmly believes that advertising can be done in a tasteful and
appropriate manner and that it would be good public policy to amend the law to
allow the information to be available.

Mr. Gleason said that revenues are flattening out and
profits even more so. He said that in order to keep sales at the present level,
it has been necessary to increase the prize payout—particularly on instant
games, which comprise over 60 percent of sales. He went on to say that they are
working to increase sales through the continued growth of scratch-off tickets,
placement of 200 new instant ticket vending machines in early 2008, looking for
new computerized game opportunities, and utilization of new media in
advertising and promotions.

Mr. Gleason explained that operating expenses in FY 2002
were $41.2 million, or 6.5 percent of sales, and were held in that range
through FY 2006; however, operating expenses decreased in FY 2007 to $38.2
million, or 5.1 percent of sales. The contracts with GTECH and Bell South were
renegotiated to provide between $7.8 million and $10.8 million in savings
through 2011. The majority of that savings—$6.6 million—will be realized by the
end of the current fiscal year because the Lottery was able to convince the
contractors to not only reduce the rates going forward but also to reduce them
retroactively during the current contract period.

The final chart in Mr. Gleason's presentation listed awards
for excellence and certificates of achievement received by the Kentucky Lottery
Corporation. Representative Cherry said there is no doubt that Mr. Gleason and
staff are doing a great job and that Kentucky's lottery is one of the best in
the world.

Senator Harris asked whether legislation would be required
for the lottery to expand gaming into other areas, not to include VLTs and
casinos. Mr. Gleason said that, in his and the lottery Board's opinion, current
law would authorize implementation of the game of keno; however, it has not
been offered because policymakers in the General Assembly and others have
indicated that is their preference.

Representative Ballard asked whether a business has to sell
lottery tickets in order to have a pull-tab machine. Mr. Gleason said yes. He
said the machines are placed in retail operations that offer the lottery's full
product mix. However, some retailers may offer only scratch-off tickets, along
with the pull-tab machines, because their baseline business is not sufficient
to merit placement of an online games terminal, which has an associated cost to
the retailer. He said it is not likely this policy will change and added that
the pull-tab business has, in fact, been shrinking.

Representative Wayne said that the Lottery is doing an
excellent job. He asked Mr. Gleason to comment on the Lottery's endorsement of
his and Representative Siler's 2008 BR 49, which creates a compulsive gamblers
awareness and treatment fund. Mr. Gleason said that the Lottery believes it is
good public policy for the state to recognize that there are costs associated
with problem gambling and that the Lottery is a potential source. He said, also,
that the Lottery's contribution toward the fund would not seriously diminish
the revenues it provides for other purposes.

Senator Carroll asked whether the Lottery would consider selling
its products at the 2010 World Equestrian games at the Horse Park. Mr. Gleason
said they would consider it if they are contacted by the sponsoring entity. He
noted that the Lottery has a vehicle for traveling to events and also sells
every year at the State Fair.

Representative Cherry thanked Mr. Gleason and Ms. Harville.
Discussion of the Kentucky League of Cities' 2008 legislative issues and
proposals was next on the agenda. Guest speakers were Jerry Deaton, Director of
Governmental Affairs for KLC, and Joe Ewalt, Director of Policy Development.
Mr. Deaton provided the Committee with copies of a pamphlet entitled
"Kentucky League of Cities/2008 Legislative Issues," which identifies
their top three issues for 2008.

Mr. Deaton said that Executive Director Sylvia Lovely was
unable to attend today due to a prior commitment. He said that at the recent
KLC convention spirits were not as high as usual, primarily because city
officials have huge concerns about how to fund retirement benefits for their
employees. He went on to say that the only answer currently is to either raise
taxes or cut employees and that cities do not want to face either option. The
League has been studying this issue for some time and is working currently with
the Blue Ribbon Commission on Public Employees Retirement System.

Mr. Deaton said that skyrocketing health care and retirement
costs are currently projected to double by the year 2013 and that this is KLC's
number one issue as the 2008 legislative session approaches. He explained that
they have consulted with police and fire unions and associations, and there is
general agreement to try to retain the defined benefit portion of the
retirement benefit to the extent possible. It is felt that this would give
cities an edge in recruiting. Retiree health insurance is the primary cost
driver—accounting for probably 80 percent of expenditures. KLC and union
representatives agree that reasonable increases of employee contributions to
CERS (County Employees Retirement System) should be considered in order to fund
cost-of-living adjustments and any other benefits that are not subject to the
inviolable contract. The League also recommends that the Kentucky Retirement
Systems Board of Trustees adopt a 20-year phase-in plan to fully fund future
health insurance benefits for CERS retirees. Another proposal, which would
probably require legislation, is to seek authorization for CERS to issue bonds,
if the need arises, to fund any unfunded liabilities in the system.

Mr. Deaton said that lagging revenue is another major issue identified
by the League. He went on to say that counties are struggling with the jail
situation, while cities are struggling with the retirement issue. KLC proposes
consideration of a constitutional amendment in the 2008 session that would
authorize the General Assembly to give communities the ability to let citizens
vote whether or not to have a local sales tax. He said that although the League
typically is not in favor of referendums, in this situation it believes that
citizens should have their say on the issue and that the public is ready for
such an initiative. He stressed that a local sales tax would not be an answer
to the CERS problem but would help "feed the coffers."

Mr. Deaton discussed another issue of primary interest—the
shortfall in the telecommunications tax that was passed in 2005 to replace
public service property taxes and local franchise fees on cable and telephone
companies. He explained that, unfortunately, the "hold harmless" amount
written into law is not adequate, and cities are experiencing a 15 percent
shortfall compared to previous collections. KLC will be asking that the next
state budget include almost $20 million owed to local governments since January
2006 and that the General Assembly add approximately $7.5 million to fully fund
the amount that local governments were receiving prior to the passage of the
tax. KLC's position is that this was an agreement made to cities and that they
should be "kept whole." Mr. Deaton added that Kentucky is the only
state that has addressed this issue, realizing in 2005 that in five or ten
years there would not be a franchise fee to collect.

Representative Cherry said he believes that retirement will
be one of the key issues of the 2008 session and that something will have to be
done to help cities and counties. He said it is his hope that the situation may
not appear as dire in the immediate future as it does now, based on the belief
that health insurance and market situations have improved.

Representative Pullin said that cities are constrained in
how they can tax. She asked whether KLC has looked at the possibility of giving
cities more flexibility. Mr. Deaton said that they have considered that but
that it would also require a constitutional amendment. He said that currently
the Constitution only allows for a property tax, occupational license fees, and
an insurance premium tax. Based on its research, KLC believes that a local
option sales tax by referendum is the only solution that would be palatable to
the people at this time. He said it would be the best of all world for cities
to have the ability to look at anything that would work but that he doubts this
idea would be acceptable to the public now. Representative Pullin suggested
that KLC consider a carte blanche approach, to include a referendum. She said
this would at least give each city's residents the opportunity to choose their
own destiny.

Representative Pullin said that federal storm water
requirements are a great burden to the eight little cities in her district. She
asked whether KLC has programs to help cities—particularly small ones—deal with
this. Mr. Deaton said that is basically another unfunded mandate that has been
handed down to cities and that a lot of areas will probably be looking at
initiating some type of storm water fee. Mr. Ewalt said that prevention of
sewer overflows into rivers has the biggest price tag. He went on to say that
Louisville and sanitation district #1 in northern Kentucky together have been
forced to agree to pay for almost $2 billion in improvements over the next 20
years. A group of about 15 cities recently agreed to a court-ordered consent
decree that sets up a schedule for putting improvements in place. A wider group
of cities is also facing storm water quality requirements. He said that KLC is
very much involved in helping communities by putting people in touch with
experts who can help them with financing options and scheduling of
improvements.

Representative Stein said that the Fayette County school
board just enacted an increase in the property tax rate for funding of school
facilities. She said that there was the ability for a petition drive, but a
petition apparently was never started; and although there was some grumbling,
the tax will be in effect. She went on to say that a number of members of the
General Assembly had signed Grover Norquist's "no new tax" pledge and
that she hopes the sponsor of any legislation to allow municipalities and
cities to enact their own tax would emphasize that this would not mean that the
legislature is raising taxes. Mr. Deaton agreed. He pointed out that there are
several layers of protection involved, beginning with passage of a
constitutional amendment, before a tax increase could ever be implemented.

Representative Cherry thanked Mr. Deaton and Mr. Ewalt. Next
on the agenda was discussion of 2008 BR 381, sponsored by Representatives
Cherry and Graham. As noted on the LRC web site, BR 381 would extend the
high-three final compensation window set to expire January 1, 2009, for those
state employees eligible for the benefit based upon service credit as of
December 31, 2008; extend the 2.2 percent benefit factor window set to expire
January 31, 2009, for those state employees eligible for the benefit based upon
service credit as of December 31, 2008; and extend the high-three final
compensation window set to expire January 1, 2009, for those county employees
eligible for the benefit based upon service credit as of December 31, 2008. Representative
Cherry said that the legislation would take advantage of some savings and
personnel expertise by allowing the retirement window to extend indefinitely
and, in his opinion, would be a "plus" for the Commonwealth. He
stressed that it would not open the window to new employees but would apply
only to those already eligible to retire under the window based on service
credit as of December 31, 2008. He noted that identical legislation was
introduced in 2007 but did not pass, although it did pass unanimously in House
committee, on the House floor, and in Senate committee.

At the request of the Chair, Bill Hanes, Executive Director
of Kentucky Retirement Systems, was present to answer questions about the
legislation. Mr. Hanes provided the Committee with a handout entitled,
"Potential Leave Balance Cost When an Employee Retires from the
Commonwealth/Random Sample from June 1, 2007 Retirees."

Senator Carroll asked about costs associated with the
window. Mr. Hanes said it seems to him that the bigger issue is workforce succession
planning, and he said it was his understanding that there was an effort to examine
that issue. He said that KERS (Kentucky Employees Retirement System) still has more
than 5,000 members eligible under the window but that more than 30,000 are
eligible to retire. He said that payments for accrued leave and compensatory
time due at time of retirement—especially for career employees—would have a
significant immediate impact. Opening the window would defer those payments
until time of retirement. Senator Carroll said it appears that the actual
budgetary impact is unknown, and Mr. Hanes agreed. There was also discussion of
how timing of BR 381's passage would impact the choice of retirement dates by
employees eligible under the window.

Representative Graham asked whether the original 1998 window
legislation provided for sick leave service credit. Mr. Hanes said the
legislation did not specifically exclude sick leave, although it does include
exclusions for purposes of "air" time. He said there has not been a
legal review of the question but that, in his opinion, sick leave may be
included.

Mr. Hanes made some general comments about the coming relief
in the employer contribution rates. He said that, in addition to cities, almost
all political subdivisions of counties are included in the CERS system—e.g.,
fiscal courts, recreational boards, conservation districts, etc. Cities are
affected in a more unique way by the past increases in the employer
contributions because there are more employees with hazardous coverage, and the
KRS Board is sensitive to those financial obligations. The good news is that, based
on preliminarily review, the actuary is going to recommend a change in the assumption
for future health care cost increases. If the Board adopts the change, in the
CERS system this would make a difference of about $2 billion, which would have
the effect of lowering employer contributions. He said also that disease
management and cost containment measures can make a huge difference in health
insurance costs.

Mr. Hanes said he had talked to the actuary about KLC's proposal
to recommend that the KRS Board of Trustees adopt a 20-year phase-in plan to
fully fund the future health insurance benefits for CERS retirees. He went on
to say that health insurance funding is already amortized over a 30-year
period. Health insurance funding is at 7.8 percent for KERS-nonhazardous and
about 20 percent for CERS. The actuary says that with the savings realized
through changing the health care assumption, it does not make sense to allow 20
additional years to pay off a 30-year loan. He said that the Board will
probably not adopt a proposal to increase the five-year phase-in period, but
cities and counties will be pleased to see the reduction in the employer
contribution rate due to the lower level of medical inflation.

Representative Cherry thanked Mr. Hanes. He then gave a
brief subcommittee report, in the absence of Representative Owens and Senator
Thayer, Co-Chairs of the Task Force on Elections, Constitutional Amendments,
and Intergovernmental Affairs. Business concluded, and the meeting was
adjourned at 3:00 p.m.